Venture capital keeps faith with e-commerce companies

Growth in mobile phone use points to profitable future for O2O sector

If venture capital fund managers compare themselves to experimenters, their lab is the entire economy-especially where seeds germinate and new industries grow.

Looking for those green shoots is the daily job for 42-year-old Zhou Wei, managing partner of venture capital firm Kleiner Perkins Caufield & Byers's China operation. Zhou leads KPCB's technology, media and telecom investment in the region.

Zhou has accrued eight years of experience in venture capital investment and completed 15 early-stage deals totaling $250 million.

Those deals notably include JD.com Inc, an e-commerce company that is newly listed in the US and the most likely future rival to e-commerce giant Alibaba Group Holding Ltd, and Beijing Venustech Inc, a provider of network security solutions that is listed on the Shenzhen stock market for small and medium-sized enterprises.

Other deals Zhou completed include the online subscription provider Xianguo, mobile games developer and publisher Doodle Mobile Ltd, group-buying site Manzuo, online fashion reseller Xiu, mobile advertisement company Limei and the third-party advertising technology company Miaozhen Systems.

"We look good in the sectors of wireless, e-commerce, and entertainment," Zhou said when he was outlining KPCB's China track record.

He said KPCB has high hopes for companies in the online-to-offline commerce sector, such as gaming, entertainment, and online medical healthcare companies.

He said the group-buying model, popular a few years ago, provided an important educational opportunity for most small enterprises, leading them to realize that they can promote themselves online, and much more effectively than ever before.

That is why many of them have adopted the O2O model so quickly. And O2O is most efficient with mobile networks because it enables consumers to find the services they need wherever they go. So with the popularity of smartphones, small companies can reach out to large numbers of customers and if they are really good, they can win them over and grow more quickly.

Zhou said many Chinese e-commerce companies still do not make a profit but there is "nothing strange" in that. It is a high-growth sector but competition is fierce, "in fact more fierce than in the United States."

Chinese e-commerce companies tend to rely more heavily than their US counterparts on credit.

Some of them would continue to lose money for a longer period of time but not because of a major flaw in their business.

Zhou cited JD as an example. "The company has very good growth prospects although it has yet to become profitable," Zhou said. "I don't agree with the saying that it's already winter time for e-commerce."

On the contrary, he said, more people are using smartphones. If China can come up with better solutions for Internet speed and fee charges, it would send the business into a bigger boom.

By the end of 2013, China's mobile Internet users numbered 500 million, accounting for 80 percent of the people who use the Internet, according to iResearch, a research organization focusing on China's Internet industry.

Instant communication has been the most popular use, followed by third-party payment, searching, mobile shopping and news browsing, said iResearch.

In the wireless age, as information is fragmented, distribution may at times be more important than content, Zhou said.

One example in this regard is Xianguo, an online subscription provider from whose website or app users can choose their favorite news suppliers, magazines and books.

Liang Gongjun, founder of Xianguo, has been in the online content distribution business since 1997.

His service aims to help users avoid too many choices by designing their personal need package.

Xianguo's business model impressed KPCB and drew an investment of $8 million in 2011.

Xianguo now claims to have 25 million users who have downloaded its mobile phone app, and its database has accumulated 5 billion pieces of information.

Xianguo is one of the leading players in the Chinese mobile reading market along with Zaker and Tou Tiao.

Like JD, Xianguo has yet to make a profit, but it is already generating a revenue stream from its advertising and pay-for-view services.

Liang said he is in no hurry to become profitable because he is convinced the content business will be sustained, and his company will realize its value in due course.

KPCB also takes a patient view.

"We take care of two things: supervision and help," Zhou said, explaining that his company's standard strategy is to try to understand a target company's business environment, help it recruit talent and find the right resources.

He said KPCB China wins by identifying high-potential early-stage companies and helping them grow.